Regional Economic Integration

Prepared For: Professor Dr. Abu Yousuf Md. Abdullah Course Instructor International Business Environment (L301)

Prepared By: Saif Hasan ZR - 21 Ishtiaq Rabiul Islam ZR - 25 Fahmid Shawon ZR - 28 Nafiz Alam Khan ZR - 47 BBA 18th Batch

Institute of Business Administration, University of Dhaka January 17, 2013

Table of Contents
Regional Economic Integration .............................................................................................................................. 1 The Objective of Regional Economic Integration: ................................................................................................. 1 Levels of Regional Economic Integration .............................................................................................................. 1 Case for Regional Integration ................................................................................................................................. 2 Economical ........................................................................................................................................................ 2 Political .............................................................................................................................................................. 2 Impediments to Integration ................................................................................................................................ 3 Loss of domestic jobs .................................................................................................................................... 3 Loss of national sovereignty ......................................................................................................................... 3 Case against Regional Integration .......................................................................................................................... 3 Regional Economic Integration in Europe-The European Union ........................................................................... 3 Creation.............................................................................................................................................................. 4 Political Structure .............................................................................................................................................. 4 Establishment of Euro ........................................................................................................................................ 5 Benefits ......................................................................................................................................................... 5 Disadvantages ............................................................................................................................................... 5 Regional economic integration in the Americas ..................................................................................................... 6 NAFTA - North American Free Trade Agreement ............................................................................................ 6 Effects ........................................................................................................................................................... 6 The Andean Community .................................................................................................................................... 6 MERCOSUR ..................................................................................................................................................... 7 Effects ........................................................................................................................................................... 7 CAFTA-Central America Free Trade Agreement .............................................................................................. 8 FTAA - The free Trade Areas of the Americas ................................................................................................. 8 Goals ............................................................................................................................................................. 8 Problems ....................................................................................................................................................... 9 Regional economic integration in the rest of the world .......................................................................................... 9 ASEAN .............................................................................................................................................................. 9 APEC ............................................................................................................................................................... 10 Trade Blocs in Africa ....................................................................................................................................... 10 Managerial perspectives on regional economic integration .................................................................................. 10 Opportunities ................................................................................................................................................... 11 Threats ............................................................................................................................................................. 11 Conclusion ............................................................................................................................................................ 11

Regional Economic Integration

Regional economic integration is a process in which states enter into a regional agreement in order to enhance regional cooperation through regional institutions and rules. These agreements among countries in proximity are taken to minimize or eliminate tariff and nontariff barriers to the free flow of goods, services, and factors of production between each other.

The Objective of Regional Economic Integration:

The objectives of the agreement could stem from economic, political or even environmental requirements. It has typically taken the form of a political economy initiative where commercial interests have been the focus for achieving broader socio-political and security objectives, as defined by national governments. Removing barriers to free trade in the region Increasing the free movement of people, labor, goods, and capital across national borders Reducing the possibility of regional armed conflict (for example, through Confidence and Security-Building Measures) Adopting cohesive regional stances on policy issues, such as the environment, climate change and migration Exert some control over inflation

Levels of Regional Economic Integration Characteristics Free Trade Levels of Regional Economic Integration Customs Common Economic Union Market Union Political Union

Abolishment of tariffs and quantitative restrictions of intra-trade Common tariff to offshore trade Liberalization of factor movement Economic policy harmonization Perfect unification of all policies by a common organization Examples

EFTA, NAFTA

Andean Community

MERCOSUR

European Union

None

1|Page

Figure 1: Levels of regional economic integration

Case for Regional Integration

Economical

Economic Theories suggest that free trade and investment is a positive-sum game, in which all participating countries stand to gain. So, the theoretical ideal would be an absence of barriers to the free flow of goods, services and factors of production among nations. Even though the WTO (World Trade Organization) is trying for free trade across the globe, in a world of many nations and many political regimes, progress has been limited. Regional economic integration can be seen as an attempt to achieve additional gains from the free flow of trade and investment between countries beyond those attainable under such agreements such as the WTO. It is easier to establish free trade and investment regime in a limited number of adjacent countries than among the whole world.
Political

Linking neighboring countries and making them increasingly dependent on each other through regional economic integration create incentives for political cooperation between the neighboring states and reduce the potential for violent conflict. In addition, the countries can enhance their political weight in the world.

2|Page

Impediments to Integration

Despite the strong economic and political arguments in support, integration has always been difficult. This is because of two primary reasons-

Loss of domestic jobs

Even though integration aids the majority, it has its costs. A nation as a whole may benefit while certain groups suffer. For example, due to 1994 establishment of NAFTA, some Canadian and U.S. workers in low cost, low skilled industries such as textiles lost their jobs due to the cheap labor in Mexico.
Loss of national sovereignty

Concerns over national sovereignty arise because close economic integration demands that countries give up some control over key issues like monetary policy, fiscal policy and trade policy. For example, even though many countries in the EU have signed on for using euro as the only currency, Great Britain still retains the right to opt out of any single currency agreement because many British believe that switching over solely to the euro would result in a bureaucracy run by foreigners.
Case against Regional Integration

The benefits of regional integration are determined by the extent of trade creation as opposed to trade diversion. Trade creation occurs when high cost domestic producers are replaced by low cost producers within the free trade area. It can also occur when a high cost external producers are replaced by low cost external producers. Trade diversion occurs when low cost external suppliers are replaced by high cost supplier within the free trade area. A regional trade agreement will only benefit the world if the amount of trade creation exceeds that of trade diversion.

Regional Economic Integration in Europe-The European Union

The European Union (EU) is an economic and political union of 27 member states which are located primarily in Europe. The EU operates through a system of supranational independent institutions and intergovernmental negotiated decisions by the member states. Important institutions of the EU include the European Commission, the Council of the European Union, the European Council, the Court of Justice of the European Union, and the European Central

3|Page

Bank. The European Parliament is elected every five years by EU citizens. The EU's de facto capital is Brussels. With a combined population of over 500 million inhabitants, or 7.3% of the world population, the EU, in 2011, generated the largest nominal world gross domestic product (GDP) of 17.6 trillion US dollars, representing approximately 20% of the global GDP when measured in terms of purchasing power parity. The EU was the recipient of the 2012 Nobel Peace Prize.
Creation

The EU traces its origins from the European Coal and Steel Community (ECSC) and the European Economic Community (EEC), formed by the Inner Six countries in 1951 and 1958 respectively. In the intervening years the community and its successors have grown in size by the accession of new member states and in power by the addition of policy areas to its remit. The Maastricht Treaty established the European Union under its current name in 1993. The latest amendment to the constitutional basis of the EU, the Treaty of Lisbon, came into force in 2009.

Political Structure

The European Union has seven institutions: The European Parliament The Council of the European Union The European Commission The European Council The European Central Bank The Court of Justice of the European Union and The European Court of Auditors.

Competencies in scrutinizing and amending legislation are divided between the European Parliament and the Council of the European Union while executive tasks are carried out by the European Commission and in a limited capacity by the European Council (not to be confused with the aforementioned Council of the European Union). The monetary policy of the Eurozone is governed by the European Central Bank. The interpretation and the application of EU law and the treaties are ensured by the Court of Justice of the European Union. The EU budget is scrutinized by the European Court of Auditors. There are also a number of ancillary bodies which advise the EU or operate in a specific area.

4|Page

Establishment of Euro

The euro is the currency used by the Institutions of the European Union and is the official currency of the Eurozone, which consists of 17 of the 27 member states of the European Union: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. The currency is also used in a further five European countries and consequently used daily by some 332 million Europeans. Additionally, more than 175 million people worldwideincluding 150 million people in Africause currencies pegged to the euro.
Benefits

Integrate the European nations makes the union a strong world power European Central Bank would provide an institution of monetary regulation comparable to the FED The Euro would advance ones international trade Way to challenge the power of the US in foreign exchange Inspire exporters to denominate their goods in euros as well as dollars Single Monetary Policy

Disadvantages

Monetary decisions with economic and national policies unique for the circumstances of the country Surrender their individual policies on inflation, unemployment, and economic growth Three key areas of law breaking with the arrival of the euro are robbery, counterfeiting, and money laundering This new note makes it possible to pack more than 7 million euros in average brief case Single currency makes it harder to catch money launderers 63 % more fake marks were pulled out of circulation in the first three months of 2001 compared to 2000

5|Page

Regional economic integration in the Americas

NAFTA - North American Free Trade Agreement

The North American Free Trade Agreement (NAFTA) is an agreement signed by the governments of Canada, Mexico, and the United States, creating a trilateral trade bloc in North America. NAFTA has two supplements: the North American Agreement on Environmental Cooperation (NAAEC) and the North American Agreement on Labor Cooperation (NAALC). The goal of NAFTA was to eliminate barriers to trade and investment between the US, Canada and Mexico. The implementation of NAFTA on January 1, 1994 brought the immediate elimination of tariffs on more than one-half of Mexico's exports to the U.S. and more than one-third of U.S. exports to Mexico. Within 10 years of the implementation of the agreement, all U.S.-Mexico tariffs would be eliminated except for some U.S. agricultural exports to Mexico that were to be phased out within 15 years. Most U.S.-Canada trade was already duty free. NAFTA also seeks to eliminate non-tariff trade barriers and to protect the intellectual property right of the products. NAFTA has allowed agricultural goods such as eggs, corn, and meats to be tariff-free. This allowed corporations to trade freely and import and export various goods on a North American scale.

Effects

In 1990, a quarter of total U.S. trade was with Canada and Mexico From 1993-2005, trade between NAFTAs partners grew by 250% In Mexico, labor productivity has increased by 50% since 1993 Gave background to increased political stability in Mexico United States lost 110,000 jobs per year due to NAFTA between 1994 and 2000 (most pessimistic estimate)

The Andean Community

The Andean Community is a customs union comprising the South American countries of Bolivia, Colombia, Ecuador and Peru. The trade bloc was called the Andean Pact until 1996 and came into existence with the signing of the Cartagena Agreement in 1969. The original Andean Pact was founded by Bolivia, Chile, Colombia, Ecuador and Peru. The pact was largely based on the EU model, but it was far less successful in reaching its goals. In
6|Page

1973, the pact gained its sixth member, Venezuela. In 1976, however, its membership was again reduced to five when Chile withdrew. By the mid-1980s, the pact had all but collapsed as it failed to reach any of its objectives concerning free trade due to economic and political problems. The tide shifted in the late 1980s as Latin American nations started to adopt free market economy policies. In December 2005, it signed an agreement with MERCOSUR to restart stalled negotiations to create a free trade area between the two trading blocs. From January 1, 2005, the citizens of the member countries can enter the other Andean Community member states without the requirement of visa. The passengers should present the authorities their national ID cards. Venezuela announced its withdrawal in 2006 to join MERCOSUR, reducing the Andean Community to four member states.

MERCOSUR

MERCOSUR is an economic and political agreement among Argentina, Brazil, Paraguay, Uruguay, and Venezuela; with Bolivia becoming an accessing member on 7 December 2012 to be ratified by the Member State's legislatures. It was established in 1991 by the Treaty of Asuncin, which was later amended and updated by the 1994 Treaty of Ouro Preto. Its purpose is to promote free trade and the fluid movement of goods, people, and currency. The official languages are Guaran, Portuguese and Spanish. It has been updated, amended, and changed many times since. It is now a full customs union. MERCOSUR and the Andean Community of Nations are customs unions that are components of a continuing process of South American integration connected to the Union of South American Nations.
Effects

Intra-MERCOSUR merchandise trade (excluding Venezuela) grew from US$10 billion at the inception of the trade bloc in 1991, to US$88 billion in 2010 Brazil recorded an intra-MERCOSUR balance of over US$5 billion in 2010. Trade within MERCOSUR amounted to only 16% of the four countries' total merchandise trade in 2010, however; trade with the European Union (20%), China (14%), and the United States (11%) was of comparable importance. Merchandise trade with the rest of the world in 2010 resulted in a surplus for MERCOSUR of nearly US$7 billion; trade in services, however, was in deficit by over US$28 billion. MERCOSUR earned significant surpluses (over US$4 billion each in 2010) in its trade with Chile and Venezuela. The latter became a full member in 2012.

7|Page

CAFTA-Central America Free Trade Agreement

It is a free trade agreement. Originally, the agreement encompassed the United States and the Central American countries of Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua, and was called CAFTA. In 2004, the Dominican Republic joined the negotiations, and the agreement was renamed CAFTA-DR. The goal of the agreement is the creation of a free trade area, similar to the North American Free Trade Agreement (NAFTA) which currently encompasses the US, Canada, and Mexico. With the addition of the Dominican Republic, the trade group's largest economy, the region covered by CAFTA-DR is the second-largest Latin American export market for US producers, behind only Mexico, buying US$15 billion of goods a year. Two-way trade amounts to about US$32 billion annually.

FTAA - The free Trade Areas of the Americas

It was a proposed agreement to eliminate or reduce the trade barriers among all countries in the Americas but Cuba. The proposed agreement was an extension of the North American Free Trade Agreement (NAFTA) between Canada, Mexico and the United States. Opposing the proposal were Cuba, Venezuela, Bolivia, Ecuador, Dominica, Nicaragua and Honduras (all of which entered the Bolivarian Alternative for the Americas in response), and Argentina, Chile and Brazil. There are currently 34 countries in the Western Hemisphere, stretching from Canada to Chile, that are standing members of the FTAA. The Implementation of a full multilateral FTAA between all parties would be eased by enlargement of existing agreements.

Goals

The primary goal of the FTAA is to build on NAFTA by further reducing barriers to trade. It will contain a series of commitments to "liberalize" services, including education, health care, environmental services (including access to water), energy, postal services and anything else we pay for that isnt a physical object. The FTAA effectively increases privatization and deregulation in the western hemisphere, taking power away from governments and increases that of corporations.

8|Page

Problems

United States wants its southern neighbors to agree on tougher IP theft regulations and lower manufacturing tariffs Brazil and Argentina want the U.S. to reduce its subsidies to agricultural producers and scrap tariffs on agricultural imports Venezuelan president Hugo Chavez has been a vocal critic

Regional economic integration in the rest of the world

ASEAN

The Association of Southeast Asian Nations (ASEAN) is a geo-political and economic organization of ten countries located in Southeast Asia, which was formed on 8 August 1967 by Indonesia, Malaysia, the Philippines, Singapore and Thailand. Since then, membership has expanded to include Brunei, Myanmar, Cambodia, Laos, and Vietnam. Its aims include accelerating economic growth, social progress and cultural development among its members, protection of regional peace and stability, and opportunities for member countries to discuss differences peacefully. In 2003, an ASEAN free trade area (AFTA) was established between the six original members. The AFTA has cut tariffs on manufacturing and agricultural products to less than 5%. But there were significant exceptions such as Malaysia refused to bring down tariffs on imported cars until 2005 and even then lowered it to 20% not the proposed 5%. This was due to Malaysia wanting to protect Proton, an inefficient local car market from foreign competition. The Philippines refused to lower tariffs on petrochemicals. Rice, the highest agricultural product in the region will remain subject to high tariffs until 2020.

Notwithstanding the issues, ASEAN is still progressing towards establishing a free trade zone. ASEAN wants to reduce import tariffs among the newer members to zero by 2015 (although important exceptions such as rice will surely exist). ASEAN is also pushing for trade agreements with China, Japan and South Korea.

9|Page

APEC

Asia-Pacific Economic Cooperation (APEC) is a forum for 21 Pacific Rim countries (formally Member Economies) including such economic powerhouses such as U.S., Japan and China that seeks to promote free trade and economic cooperation throughout the AsiaPacific region. It was established in 1989 in response to the growing interdependence of Asia-Pacific economies and the advent of regional trade blocs in other parts of the world. APEC has been criticized for promoting free trade agreements that would trammel national and local laws, which regulate and ensure labor rights, environmental protection and safe and affordable access to medicine. Whether APEC has accomplished anything constructive remains debatable, especially from the viewpoints of European countries that cannot take part in APEC and Pacific Island nations that cannot participate but will suffer its consequences. But it cannot be denied that if APEC eventually succeeds, it will lead to the making of the worlds largest free trade area.

Trade Blocs in Africa

African countries have been experimenting with trade blocs for nearly half a century. The number of groups is impressive, but none of them have been meaningful enough. Most of these groups have been dormant for years. Alongside significant political turmoil, the argument is that since these countries have less developed and less diverse economies, they need to be protected by tariffs from unfair competition. The most recent attempt to reenergize free trade occurred in early 2001 with the re-launch of East African Community (EAC) after 24 years of dormancy. The members were Kenya, Uganda and Tanzania. In 2005, the EAC started to implement a customs union and in 2007, Burundi and Rwanda joined the EAC.

Managerial perspectives on regional economic integration

The question here is why regional economic integration is important to international companies. It is very impactful because with it, rise various opportunities and threats.

10 | P a g e

Opportunities

Formerly protected markets are now open to exports and direct investment Because of the free movement of goods across borders, the harmonization of product standards, and the simplification of tax regimes, firms can realize potentially enormous cost economies by centralizing production in those locations where the mix of factor costs and skills is optimal By specialization and shipping of goods between locations, a more efficient web of operations can be created

Threats

Lower trade and investment barriers could lead to increased price competition within each grouping (specially EU and NAFTA) Increased competition within the EU is forcing EU firms to become more efficient, and stronger global competitors Firms outside the blocs risk being shut out of the single market by the creation of a trade fortress Firms may be limited in their ability to pursue the strategy of their choice if the EU intervenes and imposes conditions on companies proposing mergers and acquisitions

Conclusion

Indeed the world economy is simultaneously becoming more regionalized and more globalized. The trend towards regional integration has been supported in many areas by regional policy initiatives, particularly in the field of trade. Since regional economic integration is both discrimination and liberalization; its implications are profoundly ambiguous.

11 | P a g e